Welcome to Ask Money Talks News, a series answering financial questions submitted by Money Talks Newsletter subscribers.
In this installment, we’re dissecting some lesser-known rules for withdrawing money from Roth individual retirement accounts.
Following these rules is key to ensuring that these withdrawals don’t trigger federal income taxes or IRS penalties. So it pays to fully understand them before you start removing money from a Roth IRA.
Note that although the question at hand is about withdrawing conversions (meaning funds moved from a traditional IRA to a Roth IRA), the same goes for withdrawing standard contributions.
Now, let’s get to it!
Raymond P. asks Money Talks News:
“I did my first IRA Roth Conversion in December 2023. In terms of the 5-year rule, I know the IRS considers the conversion date to be 1/1/23 for my conversion, so I have four more years until I am able to withdraw any earnings on my first conversion, on 1/1/28, without incurring any penalty/taxes. I was older than 59½ when I did my first Roth Conversion.
Question – I have seen so many news articles stating two different opinions and would appreciate your interpretation the IRS code in terms of the 5-year holding periods for withdrawing earnings from my Roth Conversion.
Do I have to wait for a separate 5-years waiting period for each future Roth Conversion before I can withdraw my earnings (not contributions), or after I satisfy the first 5-year waiting period can I withdraw earnings on all future Roth Conversions before waiting for a separate 5-year waiting period?”
Thanks for your question, Raymond. This can be confusing because there are actually two five-year rules which are important when dealing with Roth IRAs.
The first rule requires waiting five years before you can withdraw the principal (meaning your contributions or conversions) tax-free — unless you qualify for an exception. The other rule requires waiting five years before you withdraw the earnings (meaning returns generated by the principal).
In your case, you’ve met one of the primary exceptions to the first rule: You’re more than 59½ years old. So you will not have to wait five years to withdraw the principal portion of your first conversion amount. In other words, because of your age, you can withdraw that principal without incurring taxes or a 10% early withdrawal penalty.
However, the second rule does apply in your situation. To withdraw earnings tax-free, you must wait five years from the date you make a contribution or conversion. In the case of your first conversion, that’s Jan. 1, 2028. (Your date is correct for that conversion, since the IRS starts the clock on the first day of the year you made the Roth conversion.)
Each time you make a subsequent conversion, you will have to wait another five years before you can withdraw that conversion’s earnings tax-free.
Note that you do not need a separate account for each conversion amount.
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